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F&O ITR Filing and Trading: What You Need to Know

Updated: Nov 30, 2023

Despite the immense potential and interest in the stock market in India, there is a large discrepancy between the number of Demat accounts and the number of people actively involved in trading.

While there are around 9 crore Demat accounts, only about 1 crore people are actually trading.

This could be due to a lack of knowledge or confusion regarding various aspects of trading, including income tax filing requirements for Future and Option (F&O) trading. In this blog, we'll provide a simplified structure for F&O trading ITR filing

Starting with the basics: what is F&O trading?

Future and Option are two types of financial instruments that involve the buying or selling of an underlying asset at a predetermined price. If a trader has a buy position and the price of the asset rises, they can make a profit. Conversely, if they have a sell position, they can benefit if the price of the asset falls. The confusion regarding income tax on F&O trading in India is at an all-time high, and it is time we broke it down into a simplified structure.

We shall dissect F&O ITR filing through the blog in its key highlights and simplified parameters and compliance!

The ITR-3 form is used to report income from 'profits and gains from business or profession (PGBP)', and the tax owed on this income is calculated according to the slab rate applicable to each individual.

Let's move over to THE SUNSHINY SIDE of reporting your business income!

Yes, it is the wide array of expenses you can rightfully claim.

Timely F&O ITR filing can help you deduct the expenses associated with it. This means that you can claim expenses such as broker's commission, Demat charges, the cost of research reports, depreciation of devices used for trading, and internet costs from the income earned.

To claim expenses for business purposes, it is necessary to ensure they have been incurred directly and exclusively for that purpose. Such expenses may include brokerage, broker's commission, subscriptions to trading-related journals, telephone and internet bills, consultant fees, and salaries paid to employees hired for business purposes.

It is important to maintain proper records of receipts and bills for such expenses and to ensure that payments are made through cheques or bank transfers rather than in cash. Additionally, expenses exceeding Rs. 10,000 in cash may not be allowed to be claimed as deductions.

If an expense is both personal and business-related, it is advisable to claim a reasonable portion of it as a business expense.

Key highlights to keep in mind for F&O ITR filing

1) It is essential to report your gains or losses from F&O trades in your tax return. Failure to do so, even due to ignorance, can lead to receiving a notice from the tax department.

2) Additionally, reporting losses can have tax benefits. Trading in futures & options is typically reported as a business income, regardless of whether you are an individual or a company.

3) Claiming expenses from your business earnings is possible when you report your activity as a business. Hence, timely F&O ITR filing is recommended.

Tax Audi

Here is a breakdown of the tax audit requirements based on your trading turnover:

Trading Turnover up to INR 2 Cr

If your trading turnover is up to INR 2 crores and you've incurred a loss or your profit is less than 6% of your trading turnover, a tax audit is applicable. However, if your profit is more than or equal to 6% of your trading turnover, a tax audit is not required.

Trading Turnover more than INR 2 Cr and up to INR 10 Cr

For traders with a trading turnover of more than INR 2 crores but up to INR 10 crores, the tax audit requirements can vary based on your profit and whether you've opted for the Presumptive Taxation Scheme under Sec 44AD.

If you've incurred a loss or your profit is less than 6% of your trading turnover, a tax audit is applicable.

If your profit is more than or equal to 6% of your trading turnover and you haven't opted for the Presumptive Taxation Scheme, a tax audit is also required.

However, if you've opted for the Presumptive Taxation Scheme and your profit is more than or equal to 6% of your trading turnover, a tax audit is not applicable.

Trading Turnover more than INR 10 Cr

For traders with a trading turnover of more than INR 10 crores, a tax audit is applicable regardless of whether you've incurred a profit or loss.

F&O traders

F&O traders are required to undergo a tax audit if their trading turnover exceeds INR 2 crores and they've incurred a loss or their profit is less than 6% of their trading turnover. For traders with a trading turnover of more than INR 10 crores, a tax audit is applicable regardless of profit or loss.

Classification of a Trading Income

Speculative and non-speculative business income are the two types of Trading income. Intra-day trading transactions get considered speculative, as there is no delivery of shares involved, while other F&O transactions get classified as non-speculative.

If you suffer a loss from non-speculative F&O trading, you can use that amount to offset the loss against any income head, except salary. For instance, loss from F&O trading can be offset against income from your house property, capital gains, income from other sources, and any non-speculative income. Any unused loss can be carried forward for up to eight years and can only be offset against non-speculative business income.

Additionally, if you incur a loss from intra-day trading (which is speculative), you can only offset the loss against speculative income. Any unused balance can be carried forward for up to four years to offset speculative income.

If the income earned from F&O trading is considered non-speculative business income, it will be taxed at normal slab rates. If the total income from all sources, including F&O trading, exceeds INR 10,000 in a financial year, advance tax payments will be required in four quarterly installments according to the application due date.

For intra-day transactions, the transaction settlement amount, whether positive or negative, is considered the turnover. For example, if Swati buys a stock 'X' for ₹1,500 and sells it for ₹2,000, the difference of ₹500 represents the turnover. The same applies to futures trading. For instance, if Swati enters into a future contract worth ₹2 lakhs and later sells it for ₹1,95,000, the negative difference of ₹5,000 is the turnover.

In options trading, Swati should also take the premium collected on the sale of the option into account. For instance, if Swati buys an option on an index of 200 units for ₹20 and sells it for ₹30, the turnover is (200 units * (₹30-20)) plus the option premium received (200 units * ₹30), which amounts to ₹8,000 (₹2,000+₹6,000).

Wrapping Up F&O ITR Filing and Trading

I trust the blog brought clarity to you concerning F&O trading ITR filing. But don't worry if you have more doubts. Tax Buddy, your go-to tax guide, will assign a tax expert to you and file your ITR on your behalf, setting you free from the added pressure of keeping up with the ever-shifting policies and budgets.

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